LIQUIDITY RISK AND ITS IMPACT ON FINANCIAL PERFORMANCE OF FINANCIAL INSTITUTIONS IN PAKISTAN

Iftikhar Ahmad, Prof.Dr. Farzand Ali Jan

Abstract

The recent financial crisis has highlighted the significance of sound liquidity management. Liquidity risk is one of the key issue for financial institutions. An organization with a strong asset base, adequate capital and earning may fail if not sustained good liquidity positions. This study attempts to empirically examine the impact of liquidity risk on the performance of selected banks operating in Pakistan. The panel data over a period of 2006-2015 was collected from the yearly published financial statements of banks working in Pakistan. The data was examined through the panel data regression model. Bank size, nonperforming loan ratio and capital adequacy ratio were used as surrogate variable for liquidity risk. The profitability of the selected banks was measured by taking the ratio of return on assets. The results of the regression model show a major impact of liquidity risk on the performance of Banking Institutions. The influence of the capital adequacy ratio and bank size was found significant and positive, while the influence of the nonperforming loan ratio proved insignificant. This study helps to understand the important parameters of liquidity risk and their influence on bank profitability. This study is valuable for risk managers to alleviate liquidity risk by having satisfactory liquid assets. This minimizes the liquidity gap and dependency of the financial institutions on the repo market.